Many new and existing businesses today are S Corporations. S Corporations are popular because they provide several advantages to the shareholders. One of the best known advantages is the “pass-through” taxation. Pass-through taxation allows the profits and losses of the S Corporation to flow directly to the shareholders, where they are only taxed once. In contrast, the profits of the regular C Corporation are taxed at the corporate level and then again when profits are distributed to the individual shareholders. This is referred to as double taxation.
To preserve the tax benefits of an S Corporation, the following must be maintained:
- It must be a domestic corporation. It cannot be a foreign corporation.
- Only individuals and certain entities can be shareholders. They cannot be partnerships, corporations or non-resident alien shareholders.
- Have no more than 100 shareholders.
- Have one class of stock.
- The S Corporation cannot be an ineligible corporation (i.e., certain financial institutions, insurance companies, and domestic international sales corporations.
If a company’s S Corporation status is lost, the company will be treated as a C Corporation and therefore may be subject to double taxation. In addition, losses incurred by the company will not flow through to the shareholders and there will be a five-year waiting period before S Corporation status can be reelected.
If you have any questions about obtaining or maintaining S Corporation status, please contact me.